Your Investments: Should you count on an inheritance?

By AARON KATSMAN
March 24, 2011 07:37

No one likes to discus matters of death, neither the children nor the parents, not even the financial adviser.

3 minute read.



Aaron Katsman

Aaron Katsman 58. (photo credit: Courtesy)

When working on financial plans for clients, the trickiest issue that usually comes up is inheritance.

Inheritance is one of those issues that no one really wants to talk about.

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A large US insurance company put it this way: “Inheriting money is bittersweet. Although someone you cared about is gone, that person thought enough of you to leave you a portion of his or her hard-earned money.”


While for financial planning purposes it’s important to know what type of inheritance you will be receiving, we tend to shy away from topics that we think might bring an ayin hara (evil eye).

To know or not to know?

I recently sat with a couple to go over their various assets. I asked them if they had any idea about what they might receive as an inheritance (may their parents live until 120). The answer they gave me typified the approach parents take to this issue.

The wife said her parents were open with her and the rest of her siblings, and she knew more or less what they owned and what her inheritance would be. The husband had no clue whatsoever as to what his parents’ financial situation was, and said they never spoke about such issues.

Many older parents prefer secrecy regarding financial matters. In some cases, this is justified because their children might not be able to properly deal with the information. Alternatively, if you are at this stage of life, understand that your children’s lack of information might lead them to poor financial decisions.

Don’t rely on it

While making financial plans, when the issue of inheritance comes up, sometimes the initial reaction is: “We don’t want to rely on it.” I actually like this approach. Try planning your finances based on what you have, not what you may or may not receive.

If you are planning to buy a house, figure your price based on your current assets. I too often see people “overbuy” (i.e., buy more than they can afford) because they estimate that in six to eight years they are going to come into a large inheritance.

The problem is that in most cases you have no way to know when you are going to get this money.

On the other hand, if you are trying to do long-term retirement planning, and your parents are getting on in age, then I do feel it’s appropriate to get an idea of what you might receive, because in 20 years or so, this will become a reality and your retirement will also become a reality, so you need to plan for it.

‘Ayin hara’ vs need to know

There are different approaches among financial planners regarding how to deal with the issue of potential inheritance. There are those who say the children should ask what they should expect as an inheritance, or as a gift, and then they can plan accordingly.

I believe in a much more subtle, respectful approach. After completing a financial plan, the child should approach the parents, explain the situation and ask if the assumptions that were made were reasonable. If so, enough said; if not, the parent can go into more detail about what the child can expect to receive.

Sensitivity

No one likes to discus matters of death, neither the children nor the parents, not even the financial adviser. Often when these issues are brought up, everyone starts to squirm in their chairs. Nevertheless, it’s important to open the lines of communication among parents and their children. That way, all sides know what to expect, and there won’t be any inflated expectations.

aaron@lighthousecapital.co.il

Aaron Katsman, a licensed financial adviser in Israel and the United States, helps people with US investment accounts.


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